Reference no: EM133110595

-Watta Company has only common equity and bonds. You are asked to estimate Watta Company's WACC and you have the following information: Watta's next stock dividend is expected to be $1 per share. This dividend will grow at 6% indefinitely. The stock currently sells for $50 per share. Watta has a target debt-equity ratio of 2/3 and it can sell 10-year coupon bonds with a coupon rate of 8% at the par value. The average going market interest rate for all other companies' debts in the industry is 12%. If the tax rate is 21%, what is the estimated WACC? (The company does not have any differed stocks).

-M&M Theorem argue that in a world with no taxes, capital structure does not matter. Why is this the case? How will their argument change in the real world? Discuss and illustrate the change in firm value with an appropriate graph under real world conditions.

-You are the CFO of a company that has been following the popular "somewhat constant dividend payout" policy. Recently, you are considering a change in the dividend policy with an eye to enhance shareholders value. Specifically, you would like to change the policy to first consider allocating the company's available cashflows to fund all positive NPV projects and then pay out any leftover cash, if any, as dividends to shareholders. Discuss throughly the pros and cons of such a change according to the theories we have discussed in class and in the textbook. At the end of the day, would you change the policy? Why?

-Assume that the average firm in your company's industry has a required rate of return of 13%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work which leads you to expect that its earnings and dividends will grow at a rate of 50% this year and 25% the following year, after which growth should math the 6% annual industry average growth rate. The last dividend paid (D0) was $2. What is the fair value of your firm's stock at time 0?

-CAPM can trace its development from the insight which shows that the process of optimizing the return/risk ratio will ensure that every investor will invest in a portfolio of risk free asset and the risky market portfolio (also known as the two find separation theorem). Explain and illustrate with a graph why no one will invest in other risky portfolios than the market portfolio. Why would every tradable asset in the market be included in this market portfolio?

-ABC, Inc. has just announced today (May 20, Mon) that it would pay $2/share dividends to each shareholder of record on Jun 5 (Wed). Its current price is $45 and its shareholders' average tax rate is 30%. Assume that there are no other news or developments that will affect the stock prices between now and the dates:

-(A) What will likely be the price of its stick on June 4 (Tue)?

-(B) What will likely be the price on June 3 (Mon)?

-(C) Instead of paying $2 in cash, the company announced today that it would use the aggregate equivalent of $2/ share dividends to buy back outstanding shares over the net 12 months. Would its share price likely to increase or decline upon the announcement? Explain.